The Complete Guide
to HMO Property

Everything You Need to Know

  • Exhaustive 25-page guide about HMO property
  • Holistic overview about the basics, regulations, costs & profits
  • Explore funding & financing options
  • Industry insights & real life case studies

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complete guide to hmo property

HMOs Explained
The Only Guide You'll Ever Need

This guide will cover everything investors need to know about houses in multiple occupation, more commonly referred to as HMOs. We will break down:

  • Their defining features
  • How they can fit into a buy-to-let (BTL) investment strategy
  • What funding options may be available to investors, and how they work

HMOs can present many opportunities for property investors. However, they can also come with added complications, such as having the correct licence, as well as property rules and regulations, all of which landlords need to follow.

We will cover all this, and more, within this guide, to address the crucial details investors should be aware of before embarking on their HMO journey.

what is an hmo property

What is an HMO property?

An HMO is a home where at least three tenants, where one or more are not related to one another, live together in a single property and share common areas of the household such as bathrooms, kitchens, and/or other facilities.

When there are five or more tenants from more than one household* sharing a property, the building is considered to be a large HMO. Large HMOs often have different regulations and landlords will be required to hold an HMO license for each large HMO property they own.

While houses in multiple occupation usually fall under the category of ‘residential’ properties, it is possible to come across commercial or mixed-use HMOs, too.

A property may be considered a commercial HMO if it is particularly large, or in the process of being converted from a residential asset to a commercial space, or vice versa. Alternatively, it can relate to short-stay or term based business properties such as holiday flats, bed and breakfasts, or guesthouses.

A mixed-use HMO is when is when a building contains both a residential dwelling and commercial facilities, underneath one roof. For example, a flat located above a shop.

*A household is defined either as a single person or members of the same family who live together.

houses in multiple occupation

What types of properties count as houses in multiple occupation?

There are many types of HMO properties, which spread across residential and commercial buildings, as mentioned in the previous section. The most common example is a house share. These are residential properties where groups of people live together, but rooms are usually rented out individually.

Typically, these properties are popular with students (i.e., student accommodation that is let out by the university, or is privately owned by a landlord) and young professionals.

Houses are often converted into HMOs, through several means. For example: a house can be divided into bedsits with some shared facilities, or can be converted into self-contained flats.

Commercially, hostels, bed and breakfasts, and certain hotels being used on a short-term basis can also count as HMOs. More niche examples can include housing for refuges, or employee accommodation.

what is the demand for hmo property

What is the demand for HMOs?

Demand for HMO has risen in recent years. Census data released in early 2023 showed a 16.7% increase in 16-24-year-olds living in communal establishments between 2011 to 2021.

As to be expected, young students are key utilisers of this type of property, and demand may only rise from here:

  • In the 10 years leading to 2021, student enrolments, for both undergraduates and postgraduates, rose from 2,503,010, to 2,751,865
  • The UK also saw a jump in higher education acceptances between 2021 and 2022
  • Entry rates among UK 18-year-olds reached record highs

Demand could still rise further, as the UK remains on track to face a shortfall of around 450,000 student beds by 2025.

Are they worth it?

Renters expect certain comforts. This expectation will also change depending on the target audience. They seem to focus on elements such as more space, better services, and access to certain facilities such as en-suites. This spills over from the student market too. Young professionals often seek out shared accommodations for their affordability and social perks as they start their careers.

Landlords appear to have caught on to this. Between 2018 and 2022, mortgage lending for HMO purchases more than doubled, rising from £310m to £683m. Also, the potential higher yields that HMOs can generate are likely behind this.

  • On average, HMO rental yields in the UK can be between 6% – 9%
  • For comparison, average yields across the entire BTL market sat around the 5% mark in mid-2023

Whilst landlords may receive a higher yield, shared accommodation is often popular for younger tenants due to their more cost-effective living arrangements, when compared to living alone in studios or apartments. With nearly 5 million households at risk of living in unaffordable homes by 2030, it’s likely more renters will seek out the cost-saving benefits of HMOs over the coming years.

Advantages of HMOs

There can be many advantages to investing in houses in multiple occupation:

  1. As HMOs are rented by multiple occupants, this often leads to a higher rental income than letting to a single tenant, pushing rental yields up.
  2. With such a high tenant demand, HMOs hold the potential to offer landlords more flexibility. Tenants often seek out shared accommodations for their lower costs. This can make it potentially easier for landlords to find renters for their properties, advertising room-by-room, or as a whole property with a minimum tenancy number.
  3. With so many tenants in an HMO property, void risk* could be lowered. If one tenant moves out, there are still others covering the rent while landlords look for someone new to move in.
  4. Investors may be able to benefit from greater economies of scale when it comes to furnishing and upkeeping the property. A single tenant in a flat will require their own fridge, oven, bathroom etc. But, with a house in multiple occupation, investors could have 5 tenants sharing one set of facilities, meaning they don’t have to fork out for multiple white goods.
  5. Investing in HMOs can make choosing target tenants easier. As we have discussed, HMOs are notoriously popular among students and young professionals. Fortunately, it can easy to identify specific university towns across the UK. By knowing where students are based, investors can often narrow down their options and conduct research ahead of a property purchase more easily.
  6. HMOs can allow property investors that may only have chosen other types of rental properties to diversify their holdings. By spreading capital across different property types, investors may be able to shield themselves from asset-specific downturns. For example, if their commercial properties are struggling to generate income, a residential HMO could pick up the slack due to their expected premium yields.
  7. Whilst the housing can go down as well as up, HMOs often remain in high demand due to the lower cost for their tenants. Meaning that should investors wish to sell their asset at some point in the future, they are likely to find a landlord who will be keen to snap it up, particularly in student heavy areas.

*An example of a void risk is when a landlord lets out their property to one person, or family, in one go. If they were to move out unexpectedly, it puts the landlord at risk of losing all of their rental income, until a new tenant is found. These empty months are known a ‘void periods’. With an HMO, the rent can be split across multiple tenants, if tenancy agreements have been conducted individually, therefore potentially lowering the risk of a rental void.

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Things to consider before purchasing an HMO

While HMOs can present many opportunities for investors, there are always potential downsides that should be considered:

Initially, there are likely to be high entry costs in comparison to other kinds of BTL investments:

  • In July 2023, research showed the average HMO property value sat at £863,000 in London. The average price spread across all property types in the Capital was £534,265, significantly less.
  • The limited availability of HMOs, and their comparative large sizes also add to their substantially higher property value.

The ongoing costs can also be sizable, especially when it comes to wear-and-tear.

  • With HMOs, investors will have more tenants living in their property, likely changing at a more consistent pace. This raises the chances of accidental damages or general household items durability deteriorating at quicker-than-average rates. Examples can include: broken furnishings, mattress longevity, stained carpets, electrical damage, chipped wall paint: and so the list goes on…

It can be more difficult to attain finance for HMO investments.

  • Generally, securing a mortgage may be trickier, as fewer lenders offer HMO Buy-to-Let deals when compared to other BTL mortgages.
  • A first-time landlord looking to start with an HMO property may struggle to find a lender willing to provide a mortgage. This is because mainstream lenders may require previous landlord experience, before providing long-term HMO finance.

Investors may experience difficulties when reselling an HMO property.

  • Demand among landlords may be there, but there may still be a relatively limited pool of potential buyers. Investors should remember that some buyers won’t want to incorporate these property types into their portfolios at all.

Don’t forget to look into licensing issues that can’t be avoided.

  • Some landlords are required to obtain a license to operate and manage a house in multiple occupation. This is the case for large HMOs, where there are 5 or more tenants from 3+ households.
  • It is important to remember that criteria and regulations can vary and change depending on the local authority. It’s always worth checking online to find out what rules apply to the local council that the property is assigned to, before purchasing or converting a HMO. For example, the rules that need to be followed in London may be very different to the rules found in Bury.
  • These licensing rules can be arduous. If they’re not followed correctly, landlords may face hefty fines or legal action.
costs of hmo

Costs of HMOs

Running a house in multiple occupation can involve an array of costs, many of which may not be found in other types of BTL investments, or would be generally lower.

Standard costs

If property investors are purchasing an HMO, there will be the standard costs to budget for. For example:

  • Initial purchase price
  • Ongoing mortgage repayments
  • Taxes (council tax for HMOs is usually covered by landlords, not by tenants)

Additional costs

But there may also be additional costs, which will vary widely from HMO-to-HMO. These may need to take into account, such as:

  • Heightened maintenance bills
  • Licensing costs
  • Insurance fees and more.

Influencing aspects

But it doesn’t stop there. Other aspects that will play a part in affecting an investors finances include:

  • The size of the property
  • Where it’s based
  • The investor’s personal financial circumstances etc

In Q4 2022, BVA BDRC Landlord Panel research suggested that the proportion of gross rental income spent on maintenance and running costs of HMOs sat at 26%.

Unexpected costs

Investors also need to consider the likelihood of unexpected costs. For instance, having more tenants will likely increase the chances of damage, meaning repair costs may need to be covered more frequently.

  • Shared accommodation often has high levels of “traffic”, as the nature of the property usually sees tenants move in-and-out on a regular basis. For example, new renters may need to be found every academic year for student house shares.
  • Set terms could also lead to void periods, where part of the rent isn’t being paid. This could be the case if the tenant’s lease runs alongside the academic year, generally September to June/July. Having multiple tenants can sometimes help with this. But investors will want to fill these voids as soon as possible.
  • Investors also need to keep on top of local licensing rules. As mentioned above, they will be different across the UK. Failure to stick to any applicable rules can result in costly fines. Certain management services can be utilised to oversee all this. However, these kinds of providers will levy a charge to do so. Investors can find out what their local authority’s regulations are on the gov.uk website, or by contacting a local council directly.

Research

Unfortunately, there is no ‘one budget fits all’ for houses in multiple occupation. It is why conducting individual personal ‘market research’ ahead of time can be worthwhile. This can also offer insight into:

  • What other landlords are charging for rent within the area
  • What tenants are willing to pay for different property types
  • What spec tenants in the area may expect to see from the property, or is missing in their area

Remember though, even with all these costs, HMO properties can often offer the potential to generate higher yields. The income generated could be enough to cover the ongoing bills. It’s important to look at every circumstance on its own merits.

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landlords responsibilities

What is the landlord responsible for?

HMO landlords, have several responsibilities.

  1. If they need to apply for a license, their local council will check the property. They will ensure it meets certain standards and is properly managed. They will also check to see if the landlord is a “fit and proper” person for the task at hand.
  2. Generally, private landlords are always responsible for certain repairs. This includes keeping electrical wiring, pipes and drains, boilers and more all up to scratch.
  3. If investors are renting their property to at least 5 people, they must also ensure that:
    • There are enough rubbish bins
    • The property isn’t overcrowded
    • Electrics are checked every 5 years
    • Gas safety checks are carried out yearly
    • Shared areas are clean and in good repair
    • Fire safety measures are in place
    • There are enough facilities for washing and cooking
  4. The property must be safe and free from health hazards. All the equipment must be installed and maintained safely, and tenants need to receive an EPC certificate and a copy of the “how to rent” checklist (which can be found on the Government’s website).
  5. Some local authorities will also require HMO landlords to give their tenants a written statement of the tenancy terms, while all large HMO landlords must do so.
  6. Any rent increases must be “fair and realistic”. Meaning, they should be in line with reasonable rents found on the open market. The tenancies investors have in place will also dictate when and how they can raise rents.

Ultimately, landlords of HMOs have extra and/or stricter responsibilities in comparison to non-HMO landlords. They can reach out to local authorities, and experts in the market for guidance on them.

tenants rights

What are the tenants’ rights?

Tenants have certain rights and responsibilities, regardless of whether there is tenancy agreement.

Tenants will have the right to:

  • Live in a property that’s safe and in a good state of repair
  • Have their deposit returned when the tenancy ends
  • Have their deposit protected in a government-approved tenancy deposit scheme (TDP) if they rent the home on an assured shorthold tenancy that started after 6 April 2007
  • Challenge excessively high charges
  • Know who their landlord is
  • Live in the property undisturbed
  • See an Energy Performance Certificate for the property
  • Be protected from unfair eviction and unfair rent
  • Have a written agreement if they have a fixed-term tenancy of over 3years

Where a tenancy agreement is in place, it needs to be fair and comply with the law. The rights tenants have, to address or challenge any issues, will depend on the type of private rental agreement they have in place. Generally, most people whose rental agreement started on or after 28 February 1997 will be assured shorthold tenants.

If landlords fall foul of their responsibilities, their tenants have the right to take certain actions and challenge them if necessary.

Initially, tenants should speak to their landlords directly to address any concerns that emerge. Beyond this though, tenants can make formal complaints, which they can bring to the local council, or even take to the courts.

Should tenants be successful with their court action, it could end up costing landlords dearly. For example, if landlords are found to have not followed the rules when their clients paid their deposit, they may need to pay up to 3 times the amount the tenants paid as compensation. In more extreme instances, landlords can even face jail time.

become an hmo landlord

How to become an HMO landlord

The demand for rental properties is soaring. No wonder that investors are seeking the opportunities to become an HMO landlord.

Research

First-time landlords, or those purchasing their first HMO property, will want to start by doing their research. They should look into the area they’re thinking of investing in, to get an idea of whether they’ll be demand for their property.

They should ask themselves certain questions:

  • Are there already HMOs in this region?
  • What is the average rent for this property size in the area?
  • What age ranges are current HMOs targeting – 18-25, 26-35, 36 – 50, 51+?
  • Is there a large student or young profession population?

By doing research, they’ll be able to determine how their investment may fare in that local market. They can then set their rental strategy accordingly. Once they’re happy with the location they’ve targeted, they can identify the right property for their circumstances.

Fortunately, there are many options available to investors here.

  • Find HMO properties on big property sites like Zoopla or Rightmove
  • HMO focused marketplaces such as AgentHMO
  • Auction houses can offer suitable properties
  • Conversion opportunities in the commercial market

Funding

When investors are ready to act, they’ll need to attain the right funding for their situation. Mortgages for HMOs can be commonly found among the high street lenders.  They can also explore the options available to them in the specialist lending market. At MFS, for instance, we have residential bridging loans and specialist BTL mortgages at the ready.

Many mainstream lenders have a set ‘tick-box’ criteria they adhere to. If investors are a first-time landlord, for example, they may struggle to find a high street bank that is willing to offer them a mortgage for a house in multiple occupation, as many require landlord experience as part of their HMO mortgage criteria; approx. 2-years on average.

Tenants

Once HMO property has been purchased, landlords will need to find tenants for it. Estate and/or letting agents can help manage this process. However, they’ll have ongoing charges for this. Full property management fees could cost investors around 10-15% of their monthly rental income.

Finally, tenants are secured, landlords will likely need to put together a tenancy agreement. This will clearly break down their responsibilities and that of the tenants. It should make sure the relationship sets off on the right path. As a tenancy agreement is a legally binding contract, it is good practice to have a solicitor write, or check, the agreements, before proceeding.

As with all investments, expert advice should be sought to ensure that it is right for the landlords overall situation and goals.

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Licensing

The licensing of an HMO property usually falls within one of two categories:

  1. Mandatory licensing
  2. Additional licensing

Currently, mandatory licensing is required for:

  • All HMOs with 5 or more occupiers living together from two or more households who share some amenities such as a kitchen or bathroom – regardless of the number of storeys
  • Self-contained flats where there are up to 2 flats within the block, and one or both of the flats are occupied by five or more persons from two or more separate households
  • This will apply regardless of whether the block is above or below commercial premises, bringing certain flats above shops on high streets within mandatory licensing, as well as small blocks of flats which are not connected to commercial premises

However, legislation introduced in 2004 allows for local authorities to extend licensing rules to HMOs not covered by mandatory licensing. So, technically, every kind of HMO property may need to be licensed.

The application process may vary slightly between councils*. They’ll generally require details on the landlord, their property, and certain documentation on the property’s suitability.

Fees will be levied for licensing applications, which will be set by the local authority involved:

  • Landlords will need a license for each HMO they run
  • Each license is valid for a maximum of 5 years
  • Landlords must renew their licences before they run out – managing agents can help with this

Additional licensing covers all the other HMO properties that fall outside the Mandatory licensing scheme.

There is also selective licensing, which can cover all privately rented properties in a specific area.

*Check with your local authority to see if you need to apply for an HMO license, and what the local rules require. You can check on your local authority’s licensing rules through the government’s website.

maximise profit

How can investors maximise profits?

To generate as much profit as possible, investors will want to maximise their rental income. Additionally, they’ll want to minimise their outgoings, and invest in a tax-efficient manner.

It is risky to assume an HMO investment will be a success from the get-go. Investors should carry out regular reviews of their incomings and outgoings to try and maintain a consistent profit margin.

By reviewing rents regularly, investors can ensure their income keeps up with inflation and, hopefully, surpasses it. To minimise outgoings, they could also conduct research and ensure they’ve exhausted all their options, before sprucing up a property.


EXAMPLE

Say an investor wants to refurbish a property before moving tenants in. They could consider a variety of quotes beforehand to get the best price possible. Also, by painting the rooms the same colour throughout, investors can buy paint in bulk. This could keep redecoration costs down. Moreover, easy to wash furniture and regular property inspections could keep maintenance costs to a minimum.


Investors will also want to get to grips with the complexities of property tax. This is a complicated area – one which we cannot help with. But, by consulting with a financial advisor or accountant, investors may be able to take advantage of any available deductions, allowances, or other tax perks. Remember though, tax advisors will levy a charge which will need to be budgeted for.

Investors may also want to consider any management service costs they could end up paying. Such companies can help manage a portfolio, but they may prove more expensive. If investors are able to oversee their investments themselves, they could save themselves this money. It will depend on the individual and their strategy as to which is the right route.

Finally, void periods should be avoided wherever possible. This could be relatively easy within the student accommodation market as the academic year is fairly predictable. If renting to students, landlords could ask them if they’re planning to stay for more than one year well in advance. If they’re not, they’ll have time to secure replacement tenants, and avoid void periods.

Financing an HMO property

Financing an HMO

There are many ways to finance an HMO property.

The first port of call may be HMO mortgages with mainstream lenders. These are BTL mortgages specifically designed for houses in multiple occupation. This makes them a bit more niche than other BTL products.

Often, HMO mortgages involve additional criteria when compared to regular BTL mortgages. These conditions could include:

  • Higher minimum property values
  • Minimum levels of landlord experience
  • Maximum number of bedrooms and/or storeys
  • Communal space requirements

Given the tough criteria that may be found on the high street, investors could explore their bespoke finance options. At MFS, we have specialist HMO BTL Mortgages available which bring bridging like speed and flexibility to the rental market.

  • We do not stick to tick-box lending criteria
  • Every application we receive is assessed on its own merits
  • Regardless of the type of funding required, all cases will be underwritten from day one
  • A dedicated underwriter will guide our borrowers through the entire process

Additionally, our bridging loans can assist with investments from multiple angles.

We have large loans of up to £50m available, which can be utilised for substantial investments. For HMOs, this can include large residential properties, commercial assets, or student accommodation.

Our permitted & light development loans can also cover costly renovation or conversion plans. Our funding can help with basic refurbishment plans, through to major renovation projects. We can help with investing in new furniture or bringing a debilitated space back to life.

If investors are coming to the end of a major HMO development investment, our developer exit finance can help repay an initial lender, should there still be works to complete towards the end of the term. This product is designed to offer developers additional breathing space, providing additional time to wrap up the final elements of a project.

Buying process

Buying process

The process of purchasing a house in multiple occupation will be similar to that of other rental properties. There are just a few key elements that mustn’t be overlooked.

At the beginning of an investment journey, investors will want to research good locations.

They’ll also want to identify their target audience. For example, if investing in a university town, tenant demand will likely stem from students.
Once this is done, investors can look for the right property for their specific circumstances, and budget, that also matches their target market’s expectations.

Once they have identified an opportunity, investors should assess the feasibility of the investment.

This can include rental yield potential, expected demand, and regulations for the local area. The latter is particularly important.

Investors will need to determine if they need a license.

If a license is required, this should be enquired about this with the local authority as soon as possible. It will not be possible to rent out an accommodation to tenants without it.

If they’re happy to progress, they can move forward with attaining finance for the purchase.

Once investors have all their ducks in a row, they can then reach out to the lenders that best suit their needs.
This can come from a mainstream mortgage, specialist finance, or other sources.

If an offer is accepted from the seller, investors can then focus on managing the HMO, and securing renters for their property.

Industry insights

Paragon Banking Group’s PRS report for the first quarter of this year in England shows HMOs generate the best yields at 6%, versus 5.3% for houses and 5% for flats and bungalows. And their latest research shows HMO yields around the UK varying from around 6% to 9%.” (Landlord Zone)

“Wales leads the way on returns, with the average HMO delivering a yield of just over 9%, followed by Yorkshire & Humber and the North West at 8.6%. Meanwhile, the South East is delivering yields of 7.18% and in London, they’re 6.13%.” (Landlord Zone)

There were around 489,701 HMOs across England in early 2023, with the greatest proportion of HMO rental homes, accounting for 27.9% of England’s total stock, or around 145,615 properties.” (Property Reporter)

“7 in 10 students live in a privately rented HMO house share while studying in the UK.” (Campus)

Case study 1

Case study 1

We received an enquiry from a new broker, whose client was a first-time landlord. They were looking to purchase an HMO located above a commercial asset.

We underwrite from day one, so we were able to send out one of our trusted valuers to assess the property quickly. But, after receiving the valuation report, we discovered a minor complication.

The asset had space to be utilised as a 10-bedroom HMO. However, the current license was only suited to house 8 tenants. We looked into all potential options to see whether the buyer could increase the license to cover the maximum occupancy. Fortunately, this was possible, and we implemented the change.

In the later stages of the case, the client decided to purchase the property through a company. They originally planned to complete under their personal name, so the change required new paperwork.  We worked alongside the solicitor and sorted the documents on the same day. With these complications addressed, we were able to deliver funding.

case study 2

Case Study 2

Another enquiry we received came from established landlords who had gathered equity in a property. They had been renting the asset as a standard BTL but were looking to convert it into an HMO.

With six bedrooms, the property would be classed as a large HMO. As such, it needed a lot of work to fit in with the local authority’s HMO licence guidelines.

They decided to use our funding to clear outstanding debts and pave a way forward for the refurbishment. Due to how much work was needed, we were provided with a quote from a builder that included a breakdown of the details.

This built confidence on our side that all the works would be completed, and the rooms would be available to rent out in 12 months. Then, the client would be able to focus on long-term finance for the exit strategy.

As we had a clear path ahead, we were able to provide the borrowers with the time and funds needed to complete the conversion of the property.

case study 3

Case Study 3

A separate pair of investors came to us to raise funds for a new investment. They wanted to purchase a large, yet empty, hostel. They planned to convert it into a conventional HMO property.

For this loan, the investors planned to secure it against a commercial asset they owned. However, the building in question was already being utilised by other businesses. With so many moving parts, our underwriter had to move quickly to get everything lined up.

We examined the background of the businesses involved to ensure there would be no complications with the security. While having differing sets of customers and demand, our underwriter saw all the businesses had long-term leases in place, stretching over several years. This secured income for the investors, bringing in extra assurances.

For additional support, we received paperwork from the investors showing how they planned to cover their conversion plans. As the borrower had a strong financial background, experience in commercial property, and a conversion strategy with lots of potential, our underwriter was happy to issue the loan.

Conclusion

If property investors are looking to invest in HMOs, there are many opportunities available to them. But, alongside these opportunities comes potential challenges. There are several elements that need to be considered for this type of investment and hopefully, we have covered most of them here.

Though of course, no two property investment journeys will ever be the same. Some investors may find the perfect HMO online and purchase it within mere weeks. Whereas others may discover a diamond in the rough at an auction, which might require a lot of work before it becomes habitable.

All these complications will require a solution – and this is where our underwriters come in. We want to hear from property investors, so we present the best specialist finance options that suit their circumstances. Reach out to us today, so we can get the ball rolling; together.

Disclaimer

MFS are a bridging loan and buy-to-let mortgage provider, not financial advisors. Therefore, Investors are encouraged to seek professional advice.

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